Your Car: Fixer-Upper Or Scrap Metal?

When you just replaced your transmission last week and your air conditioning goes kaput, you ritually tow your car back to the repair shop. After all, you just spent $3,000 for a brand new transmission - you can't just throw this car away now, right? Or maybe you feel that it's time to move on to a newer, more reliable car. In fact, this decision should depend on whether the cost of future repairs is less than what you'd spend on a monthly car-loan payment. Here, we'll show you how to calculate the cost of your old car compared to a new one and to determine whether new wheels make good financial sense for you. Why Getting Rid of a Car You Just Put $3,000 Into Makes SenseWhen large corporations decide whether to upgrade equipment - whether it's three years old or 20 - the number crunchers determine whether the existing machine will cost the company more in the future than buying a new one. In doing this, they may consider the following factors:

Is the new machine energy or fuel efficient?

Will the new machine work faster?

Will the payments on the new equipment be greater than repair costs of the old one in the long term?

What are the lifetimes of the new and old machines?

What amount will they receive as trade-in for their old equipment?

Sunk CostsYou'll notice that past costs aren't included in the above list. The company won't consider past costs because the money it has already spent will never be returned. In the same way, if you bought your car a new transmission and a new air conditioning system, you probably will never see the $5,000 again if your vehicle only has a blue-book value of $2,000.

This theory of ignoring past expenses in evaluating future costs is an accounting theory called sunk costs. In the following four steps, you'll learn how to apply this theory to your own number crunching when it's time to consider trading in your vehicle.

Evaluating Future Repairs Versus New Car Payments

Condition of Your VehicleNo two cars of the same make and model are exactly alike - even if both vehicles are the same age and have the same odometer reading. This is because the condition of an automobile is directly related to the quality of replaced parts, how routine maintenance schedules are followed and how nice you are to your car on a daily basis. (Find out how to reduce depreciation and maximize value in Top 10 Ways To Get Top Dollar For Your Car.)

For instance, doing any of these activities on a regular basis can shorten the lifespan of your vehicle:

punching the gas pedal

failing to give your car's engine a few moments to warm up in the winter

failing to change all car fluids (i.e., brakes, transmission, power steering and motor oils) based on time or mileage schedules from your car's maintenance schedule or manual

To know what repairs your car will need in the future, talk to your regular mechanic about what your car will likely need replaced in the next two years and what these repairs would cost you. (For related reading, see The True Cost Of Owning A Car.)

Consulting Other Car OwnersWhile studying your own vehicle is the best way to find the total possible future cost of keeping your automobile, it doesn't hurt to supplement the information you gather from your repair shop with info you can gather from car forums. Discussion forums for nearly every make and model are abundantly available online. You just have to search in your favorite search engine for your vehicle's make, model and the word "forum".

By perusing these sites, you can find out about what repairs others have made in their cars' lifespans and what the sequential order was for the fixes their automobiles needed. This info is especially helpful if you work on your own car, as it will help you compile a list of parts to price out with your local dealership and auto parts stores. (Maybe a new car isn't necessary – read Car Shopping: New Or Usedto find out if a quality used car could provide better value for your dollar.) Research Monthly Loan Payments for New VehiclesStart by learning about the top five cars you'd like to consider as replacements for you your current vehicle. Look at official websites and search forums for reliability. Among your top five choices, compare price, rebates and financing offered by dealers and at least two different banks. Then test drive your top three choices. (Learn how to buy a quality car without driving your expenses through the roof in Wheels Of A Future Fortune.)

After your test drives and choosing the make and model of the vehicle you prefer, call at least three dealerships that have your chosen automobile in stock and get final offers for monthly payments that take all pricing factors into account, including:

Rebates

Financing offers

Price

Trade-in value of your current vehicle

Never accept the first bid without consulting other dealers for total price comparisons. (Considering a lease? We examine the financing options of both choices as well as their long-term implications in Pros And Cons of Leasing Vs Buying A Vehicle.)

Comparing Loan Payments to Potential Monthly Car Maintenance AmountsFinally, to decide whether it's time to replace your current vehicle, divide the total potential costs to keep your vehicle into a monthly amount. If you've calculated a two-year potential cost, divide the number by 24. If you've calculated one year of maintenance expenses, divide the number by 12.

Compare this amount with the potential car payment you researched. If it's close, also consider the gas mileage differences and how long the new car's repair warranty lasts. You may find you can drive a new vehicle for the same or less than what you're paying for your old one.